Kuwait breakeven oil price lowest in GCC

Gulf GDP growth for 2016 to be lower by 10 bps; 2017 forecasts left unchanged

KUWAIT CITY, Oct 23: Oil production estimates for the GCC was raised yet again by the IMF for 2016, while keeping estimates for 2017 unchanged. Production, is now expected to grow to 18.04 mb/d from the earlier estimate of 18.01 mb/d for 2016. Key driver for the increase in forecast was the production estimate of Saudi Arabia, which was increased from 10.22 mb/d to 10.30 mb/d.

Nevertheless, this increase comes against the backdrop of OPEC agreeing to cut production by as much as 700,000 mb/d in Sept 16, its first major agreement since the oil bear market began in 2014. Saudi Arabia in September also announced that it would reduce production if other fellow OPEC members would freeze its own production. Russia also agreed to support the effort to reduce the global glut of an estimated 1.0 -1.5 mb/d. Finer details of the production cutback would be worked out at the next OPEC meeting in Vienna on 30 Nov 16. The extent of production cut from Saudi Arabia will be of paramount interest at the event.

Furthermore, the signaling impact on non-OPEC players, and which non-OPEC players would be first to undertake the necessary action, would be keenly followed. On the other hand, according to the IMF, GCC oil exports are projected to be lower than expected in April — 16. Oil exports from the region were brought down from 13.48 mb/d to 13.37 mb/d in 2016 and from 13.46 mb/d to 13.37 mb/d in 2017. The drop is ascribed to a decline in exports from UAE & Saudi Arabia and is likely to be due to the weaker global trade conditions and rising domestic consumption, in our view.

In terms of the break even oil prices required for GCC countries to balance their fiscal budgets, all countries were running deficits, as oil prices YTD were lower than all individual break even targets. As per our analysis of IMF data, the gap between average oil prices and budgeted break even oil prices were largest for Bahrain and Saudi Arabia at over $56/bbl and $40/bbl respectively.

Kuwait and UAE had the least gap between their budgeted oil prices and average oil prices YTD in 2016 with a gap of over $8/bbl and $19/bbl. Moreover, Kuwait is expected to be the only GCC country that is able to balance its fiscal budget when oil prices are below $50 per barrel, as per the IMF, as Kuwait has the lowest breakeven oil price of $47.8/bbl and $47.7/bbl for 2016 & 2017. The break even oil prices for Kuwait were lowered since April-16 by $4.3/bbl and $5.1/bbl for the aforementioned years. UAE’s fiscal breakeven oil prices was lowered by double digits, and would now require $58.6/bbl and $60/bbl for a fiscal neutral budget.

On the contrary, the same estimates for Saudi Arabia were raised, in particular for 2016, by $13/bbl, as the country would now need an oil price of $79.7/bbl to balance its fiscal budget as against $66.7/Bbl estimated in April-16. As per our calculations, in order to reach the average oil price of $50/bbl, oil prices would now need to average over $100/bbl, which we deem as highly unlikely, given the fundamentals of the market.

The partial recovery in oil prices recently also meant that the deficit in current account balance to GDP ratio for the full year would be lower as compared to April-16 estimates, by the IMF. The current account deficit estimate for 2016 is now pegged at -3.7% of GDP as against -7.0% of GDP estimated in IMF’s previous update. The absolute value of deficits is also expected to decline by 44% in 2016, as compared to earlier estimates of $91 Bn. Saudi Arabia alone is expected to contribute to about 83% of the deficit in 2016, as the IMF expects the country to report current deficit of 6.6% of GDP for the year.

The most recent estimates of the fiscal balance to GDP ratio for the GCC region also shows improvement from earlier estimates for the current year and 2017. The fiscal deficit of the GCC is expected to be 9.8% of 2016 GDP, lower than the 12.3% deficit of GDP estimated in IMF’s previous update. The agency expects an improvement for 2017 as well, as the deficit is expected to lower at 6.9% of GDP, as compared to the earlier estimate of 10.8% of GDP. Saudi Arabia’s fiscal deficit to GDP ratio in 2016 was kept constant at 13.5% as against their previous update, but the corresponding figure for 2017 is expected to dip below double digits at 9.5% of GDP for the year, compared to a previous deficit estimate of 10.8%.

The IMF continued to reiterate the need for further policy priorities other than the ones recently announced, which would be needed along with a well -defined medium-term fiscal framework for the region. Further policy initiatives in terms of additional streamlining of current expenditures, including the public sector wage bill, increasing the efficiency of public investment and additional energy price reforms were advised by the agency as well. Fiscal consolidation would also continue to require a mix of spending cuts and pro revenue measures.

To understand the impact of past measures in boosting the non-oil sector in the GCC, we looked at the non-oil fiscal balances data of the region published by IMF over the long term, which included forecasts for the current year and the next year. Data suggested that the non-oil fiscal balance to non-oil GDP ratio worsened from the average estimate of 2000 -2012 until 2014 from 43.1% to 56.8% of nonoil GDP. Nevertheless, deficit reduction measures in the region brought down the deficit figure in the non oil sector to 45.5% of non-oil GDP in 2015. The IMF further estimates the average non-oil deficit to fall by about 20% of non-oil GDP over 2014 to 2017.

The deficit financing options available to GCC states would include a drawdown of financial assets from sovereign wealth funds, and the issuance of foreign and domestic debt. Bahrain, Oman and Abu Dhabi have either issued bonds or obtained syndicated loans in international markets. The most notable one was Saudi Arabia raising $5.5 bn in each of the 5yr and 10yr bonds and $6.5 bn in 30-year debt amounting to a record $17.5 bn in bond financing internationally, which eclipsed the $9 bn raised by Qatar in May 16. Investors reportedly submitted $67 bn in bids, as per Financial Times, which goes on to show the appetite for such instruments currently, if individual GCC states decide to take this route.

GCC states have implemented energy price reforms in varying degrees as means of curtailing their state spending. The reforms in the form of higher price is also expected to contribute to a slowing down of energy consumption in the region, and is also expected to provide fiscal adjustment support, as per the IMF. Data from the IMF also suggests that the implicit energy costs for the GCC is expected to drop from 6.7% of GDP in 2014 to 3.4% of GDP in 2016, as a result of the reduction in subsidies and higher revenues from the domestic sale of energy products.

Though the twin deficits in the GCC have shown some signs of alleviating in 2016 and 2017, we expect this to be only partially contributed by spending cuts and measures adopted so far to increase revenues. Significant global risks in terms of waning global trade activity, a slowdown in China, tighter liquidity conditions from a potential near term interest rate hike in the US, and the impact of Brexit have been rolled over to 2017 and beyond.

Nevertheless, KAMCO Research remains optimistic about the avenues available to GCC states and the ability to successfully boost their nonoil economies, as some of the measures have already started showing positive results. However, the implementation of ongoing measures and the introduction of new initiatives would be needed to further boost the private sector nonoil growth. Deficit funding measures such as international bond issuances, along with healthy credit growth backed by conventional or alternative funding for high priority projects, would be incrementally positive in our view.